China Markets trade

What If China Just Walks Away?

"Sometimes you just have to walk away."

“While a deal remains the Chinese government’s desired outcome, we think China’s hawkish tone since May has suggested a shift in thinking from being more willing to compromise to preferring to hold its ground and defend its bottom-lines”, Barclays Jian Chang wrote over the weekend, in a short piece documenting her outlook for this week’s hotly-anticipated meeting between Donald Trump and Xi Jinping at the G20.

That raises an interesting question – namely: Did the combination of Trump’s abrupt tariff escalation in early May and his subsequent decision to blacklist Huawei effectively force Beijing to resign themselves to the fact that they are dealing with an irrational actor who simply cannot be trusted? If so, has China decided that, barring convincing signals from the US side, a protracted trade war is now inevitable? More to the point: Is there no way back? Have we truly crossed the Rubicon?

Those latter two questions are probably a bit hyperbolic. Deescalation is still possible, but as Barclays goes on to write,”the blacklisting of Huawei on 15 May was a wake-up call and China is preparing for a ‘long march’ at the same time as it remains open to talks, provided the US will show some sincerity”.

Of course, the US side claims the Chinese side backtracked on its commitments, but Beijing vigorously denies this. China has variously insisted that one cannot “backtrack” on a deal that was never signed – that “commitments” aren’t “commitments” until an agreement is finalized. Trump would probably agree were he in their shoes.

Read more: What To Expect (Or Not To Expect) From The Trump-Xi G20 Meeting

Trump continues to insist that China “has to get a deal” because they’re “paying hundreds of billions of dollars”. That is a flagrant lie. It’s a testament to the so-called “post-truth” era in the US that the White House continues to get away with pushing manifest falsehoods about how tariffs actually work. The administration is aided and abetted in that effort by conservative media and even by right-wing blogs of an economic persuasion who, despite having spent years delving into the furthest reaches of international finance, seem suddenly unwilling to explain the reality of simple macroeconomic concepts to readers.

It’s possible China’s view is completely counter to that which Trump ascribes to Beijing. As Barclays goes on to write, “China may believe it has managed to get the US back to the table with its determination and ability to ‘prepare for war'”.

Indeed, Trump may discover that, very much contrary to the notion that China now “wishes they had taken” the deal that was on the table, Beijing will demand a better deal with the US elections looming. “China may think Trump is under greater domestic and international pressure and is running against time, hence may be more eager to strike a deal and hence China may be less willing to make more concessions”, Barclays contends, adding that “the terms China is willing to offer for the deal, if there may be one, could be worse than what China had agreed before Trump’s 5 May tweets.”

As far as markets are concerned, most observers think a repeat of the handshake agreement struck in Argentina in December is the most likely outcome, with both sides agreeing to postpone escalations as talks resume. Few expect a broad agreement, but not many people see a complete failure either. Here are some possible outcomes from the Barclays note:

(Barclays)

It’s unclear how Trump would ultimately react were China to express reluctance to fully reengage. It appears Beijing hasn’t quite reached their breaking point with the administration, but the unreliable entities list, the FedEx investigation and the ongoing stimulus rollout suggest they’re getting close. Another episode that finds Trump doing something like, for instance, shaking Xi’s hand while simultaneously arresting a high-profile Chinese executive (remember, Meng Wanzhou was detained in Canada on the same night Trump and Xi dined in Buenos Aires) could be a bridge too far. And, as multiple analysts have noted over the past two weeks, Trump’s threat to slap Mexico with tariffs could be a sign to other countries that striking a deal with the US won’t necessarily deter the administration from escalating things anew in the event Trump believes he can score some political points with his base by doing so.

After the failed Hanoi summit with Kim Jong Un, Trump explained that “sometimes you just have to walk away”. One wonders how he would respond if the Chinese simply turned their backs on him and told him to twist in the wind until the election.

Is that likely? No. Beijing does need a deal of some kind and Trump is probably correct to suggest that companies will begin to shift production out of China if things get worse.

But make no mistake, China is most assuredly in a better position to play the long game than Trump. That is of course unless he does away with term limits so that he, like his “good friend Xi”, can be “president for life”.


 

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1 comment on “What If China Just Walks Away?

  1. 40,000 headmen

    “It appears that Beijing hasn’t quite reached their breaking point with the administration…”. Actually, I think they did quite a while ago. They’ve just been stringing them along, and then some. To wit, China allowed Liu He to negotiate approximately 50 ‘concessions’, and then turned around and said meiyou(the Chinese word for no?) to all of it. Not just some of it. All of it. The only offer for a deal Forrest Trump was ever going to get with China was the same kind of offer that Wimpy made in the Popeye cartoon. They would gladly pay Forrest in the year 2525(yes, a Zager and Evans reference) for a promise to buy more stuff today. That kind of deal, however, was only possible in the very early days of the Trump Administration before they may have had a real handle on who they were dealing with. Steve Massocca of Wedbush was on CNBC about a week ago and said that he thought that Trump would strike a deal to enhance his prospects in the 2020 election, but that come 2020 the gloves would be off and that it would become an all out trade war. Mr. Massocca somehow thinks that only he and the person on the other side of the camera were privy to this knowledge. I have thought this for the last 2 years. It reminded me of Newt Gingrich’s mom and Connie Chung on “Eye To Eye” back in 1995. Newsflash for Mr. Massocca et al, China already knows this. Another nugget that seemed to evade detection was the speech that Xi gave to the Communist Party of China one week before Christmas last year. The headline quote on CNBC’s home page was “Nobody dictates reforms to China”. Not only did I hear no discussion of this statement, I didn’t even hear any mention of it at all. The talking heads are not listening. It is abundantly clear that China is not going to concede to Trump and the US. I don’t think that they’ll even talk until Trump rescinds all the tariffs. Even then, they’ll just stall until the election. They would be stupid and crazy to hand a victory to Trump, and risk that being sufficient to gain a second term. Virtually every talking head on CNBC says that there will be some kind of deal before the election. I say no chance. No deal. Of any kind.

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